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Comment by dclowd9901 | Hacker News Reader

That’s kind of the opposite of what I’m saying.

We need a secondary class of banks: ones that don’t leverage their deposits into investments, but rather simply keep people’s money safe.

That way you can choose your bank. Do you want a bank that will actually yield return on your deposits and pay you back in kind or do you just want to keep your money safe? It would effectively bring back investment carried savings but also allow people to store their money in safer banks with actual deposit insurance if that was their goal. The problem is that a bank is a bank and we don’t know what their business priorities or risk calculus is in any meaningful terms, so how are we supposed to choose a “safe” one?

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I've heard this suggestion in lots of places - mainly silicon valley people who didn't really think about banking a lot until the collapse of SVB (the All-In podcast had a monstrously bad segment on this for example).

The problem is that those suggesting this aren't really engaging with how our finance system works. What they're saying is "I don't want my money at risk" but what they're proposing is "I don't want to ever be able to get a mortgage". They're saying "I'd be happy with an account that doesn't pay interest" but actually, if this product was offered, you'll likely find people still opt for the interest paying accounts that have risk because they aren't really capable judging that risk.

It's also just quite a difficult thing to imagine happening, can you imagine it - out comes this product from a bank "100% backed, guaranteed not to default, 20bps charge, 0 interest", and let's imagine it really is popular and capital flees to it. You've just caused the single biggest run on the US banking system in history. How do you mechanically actually make this work?

There are legal changes that could be made to safely support that in different types of accounts without requiring customers to switch banks. In my view anything referred to as a deposit should be insured in any case, but there are other possibilities for making a conservative return.

There’s a theory that if there was such a bank, all money would flow to it making all of the other ones insolvent, in turn the financial system would collapse, since no bank has enough. The whole industry is just a house of cards.

There was actually a recent case where one bank (Custodia) tried to do this - they wanted to charge fees instead of gambling with their clients money. But the FED denied their application. They say it’s because they wanted to service crypto companies - but how would that even be a problem if they’ve always got all the deposits at hand. It smells fishy.

Why would all the money flow there? Assuming the $250k insurance level remained the majority of Americans could happily keep their money in riskier banks and earn interest instead of paying fees.

Most of the money in the system is well in excess of $250k accounts though. And the FEDs insurance fund is laughably small. Not a lot of people have to move there money to cause a major cascade (see SVB for example).

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